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Why US Oil Dominance Won't Lower Gas Prices

Booming oil production could allow the U.S. to become the world's largest global oil producer by 2020 and help the country become practically energy self-sufficient by 2035, according to a new report. But that alone won't achieve the dream of so-called energy independence that magically frees American drivers from price shocks at the gasoline pump.

The U.S. won't gain freedom from the tyranny of oil price shocks even if it overtakes Saudi Arabia as oil production king in the projections of the International Energy Agency's World Energy Outlook 2012 report. That's because the global oil market's supply and demand would still dictate the price of a barrel of oil in the U.S., even if the U.S. became a leading oil exporter and stopped importing foreign oil.

"Even if the U.S. becomes one of the leading oil producers, that may not necessarily impact a very broad and deep global oil market," said Doug Arent, executive director of the Joint Institute for Strategic Energy Analysis at the National Renewable Energy Laboratory in Golden, Colo.

Rather than "energy independence," experts say that "energy self-sufficiency" is a more accurate description of what the U.S. achieve can by exporting more oil than it imports. The IEA report similarly points out that no country is an energy "island" in the global economy.

Paying the same price

The surging U.S. oil production — drawn from unconventional oil sources in shale rock — depends on factors such as global oil demand keeping prices high enough to make it worthwhile for energy companies. U.S. companies have recently focused on developing "liquids-rich" shale formations containing oil as a more profitable alternative to "dry-gas" natural gas while abundant supplies keep U.S. natural gas prices low.

Yet domestically produced U.S. oil is bought and sold at the price that is set by global supply and demand ranging from North America to Asia. That means the boost in U.S. oil and gas production offers new possibilities for how the U.S. can manage its "energy interdependence" with other countries, Arent told TechNewsDaily.

"Whether produced in the U.S., Saudi Arabia or Nigeria, consumers will pretty much be paying the same price for the barrel of oil," said Will Rogers, the Bacevich Fellow at the Center for a New American Security in Washington, D.C. "We'll never be insulated entirely from price shocks that could develop from a crisis in the Middle East, Africa, wherever."

The oil price shocks at the pump will continue as long as U.S. cars and road vehicles rely upon gasoline rather than alternative energy sources. But the U.S. can still benefit from achieving oil self-sufficiency in other ways.

Making new opportunities

First, the U.S. can close the $460 billion trade deficit spent on importing foreign oil, Rogers said. Both he and Arent agreed that closing that oil trade gap would help boost the U.S. economy as it profits from exports rather than spending money to import oil.

Second, the U.S. can change the balance of international politics by easing its reliance on the oil of the Middle East and more unstable parts of the world, or by becoming an oil supplier that the rest of the world depends upon. The IEA report suggests that the U.S. is very well positioned to do this as the rest of the world's dependence on energy imports grows — especially with surging energy demand in countries such as China and India.

"The second effect is a bit more subtle because it repositions the geopolitics of energy, which the average consumer may not necessarily feel," Arent explained. "But it's certainly an important part of the energy interdependence world."

Rogers agreed by pointing to thepossibilities of reshaping U.S. relations with China and the rest of Asia — especially if it can become a reliable strategic energy partner.

"There is a huge opportunity for the U.S. and China," Rogers said. "[China] faces a lot of the same energy challenges we do because they import oil from the Middle East and North Africa. That's vulnerable to disruption due to natural disasters or terrorist events."